New Financial Planing : Salary = Fixed costs – Investments –
savings – expenditure..!
By Mr.Pranav, Co-Author of the
book “GameChanger”
Personal finance writers
believe about 10% of your income is a good amount for investments.
Again, if you figure you
had give more importance to future goals over current expenses, you can buck
the trend.
In fact, you can make
investing as much as about 30% of your monthly paycheck, as I have often done
in conducive times.
When
you have shortlisted the major goals you had like to invest in and then
proceeded to fund them, what remains from your monthly salary is for short-term
savings and finally current expenses.
Often
misunderstood and misinterpreted with investing, we save in places where we
should have been investing in the first place.
To
avoid this mistake, the savings bucket can be categorized into two: Short Term
Goals and Recurring Expenses.
Expenses
that are recurring every year (Diwali, Vacation etc) come under the recurring
expenses umbrella. We will save toward these expenses by opening separate Bank
or post office RD’s in their name drawing from your salary account.
Short-term
goals such as a car, down-payment for a flat /home, your wedding come under
this umbrella. While these are not repetitive, they are forecast to happen a
few years down the line.
The
reason we do not invest in the equity /share market for these goals is because
they are too near.
Returns
over the short term in equity is not guaranteed and that’s why we save under
the safer neighborhood of a Bank’s or post office’s RD. The returns are
definite, risk is negligible and we can save with precision.
To
differentiate short-term goals from long-term, take the golden number as five
years. If your goal is only 5 years away, save using a bank’s RD. If longer,
always invest some portion in the equity market or equity mutual funds.
Now,
as you have detailed into the saving bucket, you can allocate the percentage to
each goal. Depending on the importance you have for each expense, you can divvy
the amount accordingly.
From
the monthly salary, as you take out fixed costs, investments and small-term
savings, the balance remains for irrational expenditure – FINALLY!
Imagine
the feeling you had have when someone gives you money with no chip on your
shoulder: No worries over the future nor any pre-determined commitments to
fulfill (ex: parents’ housing loan).
This is guilt free spending. You
could take the money, buy shoes, or / you could do an impromptu bike trip. You could
do peanut butter fingers all night, every night or slam-chow cheese pizzas at
will. Whatever you do, this question no longer hangs over your head: ‘Am
I spending too much?’ The feeling of having money that I can spend
irrationally sometimes makes me the happiest person on earth. You could feel
the same if you have followed the money allocation process:
Salary = Fixed costs – Investments – savings – expenditure
Being
brought up in a middle-class environment made me acutely aware that there is
some responsibility perennially hanging over one’s head.
As I grew up, my mom had to keep working to
keep me educated. As time progressed she wanted something for herself but it
wasn’t possible always.
An
impulsive purchase or miscalculated expenditure stung for days. Seeing what my
parents had been through made me realize that having some amount for irrational
expenditure is a saner version of living life. Funding my future needs first, I
could rely on this feeling of being assured for the remainder of the month.
This sort of represented, that I have done my homework before I spent the
evening at the park.
Most
of the friends I know have kept 15% to guilt-free spending. But you can accord
this portion depending on your conscious spending plan.
To
sum up, your monthly money table will look like this.
As
we have looked at the theory of simplifying finances, let’s dive into a real
life example
Recent Example
Mr. Ashwath was a
classmate of mine with whom I walked through the 4-bucket system.
I
told him about the next-100 idea. He asked me what it meant and I replied: “It
means you know where the next 100 is going to go.”
Mr. Ashwath decided to
allocate his salary in terms of % as below.
Per
his next-100 breakdown, 15 would be toward fixed costs like car EMI and petrol.
He does not have more fixed costs because he stays at home with his parents and
has no student debt.
With
his investments, 5 goes toward the employer match EPF and another 5 toward a
Nifty 50 Index fund for retirement.
About
30% of savings splits between 25% for a house downpayment and 5% for Himalayan
trekking expeditions that he does every year. The remaining portion of 40% to-50%
from guilt free spend gets spent irrationally.
When
he finished working this out he exclaimed, “Unbelievable!!!” and
stopped speaking for a few minutes.
Since
he works in technical sales at Saint-Gobain, he gets to travel a lot and eating
out is his second giving of life. To impress clients, he spends quite a lot on
clothes too. When he automated this allocation, it seemed unreal. Previously,
he used to do things with money haphazardly.
Now,
he knows how much he can save, how many designer ties he can buy and how many
times he could eat out. Automation made sure the money from the salary account
was disbursed into each bucket appropriately without him thinking about it.
After
automation, this is how his cash flow works:
1.
Right when the salary
is to be deposited, 5% goes toward the employer EPF match.
2.
A day later, an
additional 5% gets pulled out for investing in a Nifty 50 fund – towards
retirement in addition to EPF.
3.
Three days later, the
fixed costs are paid from the salary account – car EMI (he has a lot of
travel).
4.
One day later, he pays
the credit card balance for the irrational spend and fuel costs of the previous
month.
5.
The same day, 30% of
savings are siphoned – which automatically spread into 25% for home down
payment and 5% for vacation treks into two separate RD’s.
6.
Whatever remains, he
gets to spend it irrationally. Nominally, he uses a credit card/ Paytm wallet
to pay so that he can keep tabs of his financial situation.
When
the 20th of the month rolls around, he looks at his bank
balance and makes a frugal living for the remainder of the month (if
he’s over-spent before).
After
he’s automated everything, I’ve seldom heard him say, “It’s the month
end and my finances are tight, bro.” In fact, he never cancels on an
eating-out plan due to finances and he’s spent a grand total of 1-hour managing
money. This is automation at its finest exploitation!
As
you’ve automated, the tangible result is: you need less than 5 minutes of work
per month and you’ll know how every gear of the bigger machine is working. Now,
you could actually dream about spending more time with kids or having bigger
vacations – your money life is sorted.
To
help you further, we have documented the entire journey from being lackluster
with money to becoming smart in our book ‘Gamechanger’
The Gamechanger
If
you had like even better tips for how you can leverage cheap travel – flights
that just cost 200 from Mumbai to Entebbe, automate your finances and be
something of a Jedi-master of money, we hve compiled everything into 166 pages.
Right now, I’ve co-authored a lifestyle book
with Pattu of Freefincal that delves into
personal finance, cheap travel, credit cards, automation and many more.
Get your copy on Amazon right here.
It hit the shelves on 2017, June 2nd and is already on it’s way to becoming a
best-seller.
If
you are ready for some advanced material on travel, make sure to grab a copy of
the Ultimate Travel E-Book.
It has earned generous praise and people have emailed in saying they’ve
secured flights for half the price than they normally find after reading the
E-Book.
About the author..
Mr.Pranav, the co-author
of the book “GameChanger”. Pranav Surya with an MBA in Hospitality &
Tourism at Glion & Bachelors in Mechanical Engg. He did a project at Bosch
Bangalore which was when he realized engineering wasn’t for him. Upon asking
multiple people from different industries, moved into hospitality and tourism
and right now have traveled to 9 countries across 3 continents for work and
some leisure.
He can be found half of the time at Anna Centenary Library in
Chennai and the other half traversing across the globe for work.
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